This article was first published in the May 2016 Malaysia edition of Accounting and Business magazine.

The recent introduction of the new Malaysian Private Entities Reporting Standard (MPERS) is timely, given the increasing prominence of local private entities and small and medium-sized enterprises (SMEs) in the regional and global markets.

MPERS, the new financial reporting framework for private entities that came into force on 1 January 2016, is seen as a vital step in preparing local private companies for globalisation as well as the challenges that come with it. 

‘The introduction of MPERS is part of aligning local businesses to global standards, and we believe the benefits will outweigh the costs in the long run,’ said Mok Wan Kong, ACCA Malaysia’s Public Practice Committee (PPC) chairman and KPMG partner, at a recent discussion on the topic. 

MPERS is practically identical to the International Financial Reporting Standards (IFRS) for SMEs set by the International Accounting Standards Board, except for the requirements for those involved in property development activities.

During the discussion, PPC members acknowledged that there will likely be some teething problems with the adoption of the new standard, which replaces the outdated Private Entity Reporting Standard (PERS). They also pointed out that private entities have the option to choose whether they want to use MPERS or adopt the Malaysian Financial Reporting Standards (MFRS) as their accounting framework. This, they say, depends on their future direction and what financial reporting standard their parent or holding company is using.

Speaking during the discussion, Mok explained that it is not a given that private entities must adopt MPERS. ‘The first misconception people and companies have is that they should move to MPERS by default. They have the option to go for MFRS,’ he said, adding that companies have to get up to speed in their understanding of both frameworks.

Companies that are part of a group operating outside Malaysia are more likely to adopt MFRS. ‘Many companies in Malaysia belong to companies overseas, and they do not use MPERS. Most of them would be IFRS or US GAAP compliant,’ Mok said. ‘If the entity adopts MPERS, the entity would have to realign to group accounting policies for purposes of group reporting and this will increase the workload of the finance team.’

Nexia SSY director Michelle Yong said that many of her clients are multinationals (MNCs) with units operating in Malaysia. ‘We advise them to move on to MFRS because it is more streamlined with their holding companies, which are MNCs,’ she said.

However, for companies that are essentially operating in Malaysia without holding companies overseas, it is less of an issue for them to move from PERS to MPERS. ‘The other category of companies are those that are stand alone; they will have to make a choice as to which accounting framework is better for them,’ Mok said. ‘This depends on the industry they are in, the resources that they have and so on.’

Major differences

EY partner Hoh Yoon Hoong suggested that companies consider the major differences between MPERS and MFRS. ‘For example, in the case of investment property, MFRS allows for two models – the cost model or fair value model – but MPERS only allows fair value model,’ Hoh said. ‘Hence if the parent adopts MFRS and adopts the cost model, it makes no sense for the subsidiary, a private entity, to adopt MPERS, which only has the fair value model option.

‘If the parent adopts the cost model but the subsidiary adopts MPERS, the subsidiary will have to obtain a valuation for its investment properties (and incur cost for appointing an independent valuer) for purposes of its statutory reporting but the carrying value of the investment properties carried at fair value will have to be restated back to cost to be in line with the parent company’s accounting policy,’ Hoh explained.

Mok also pointed out that MPERS is very prescriptive while IFRS is principles-based. ‘One has to understand the differences between the two frameworks before deciding which one to adopt.’

Hoh concurred on this point. ‘As IFRS is principles based, and sometimes you may have applied the wrong judgment, you can still argue it out depending on the circumstances. But if it is rules based it is either a yes or no, right or wrong,’ he said. 

Lack of awareness

The announcement for MPERS transition was made in 2013, so private entities have had two years to prepare for the new standards. However, the PPC members noted that there was a general lack of awareness and urgency among private entities on transitioning to MPERS. 

This is also consistent with a recent survey by the Malaysian Institute of Accountants, which revealed that more than half of respondents who are preparers of financial statements have not attended any training on MPERS, and only 35% of preparers have discussed their implementation strategy with a professional adviser such as an auditor.

Mok noted that audit firms have been conducting training on MPERS for their clients. ‘However, the attendance for the training is not as high as we want it to be,’ he said. ‘It seems to me that companies are still very relaxed about it. Maybe they were so stressed out with Goods and Services Tax (GST) [in the first half of last year].’

Bernard Tan, a partner at Baker Tilly Monteiro Heng, agreed that businesses, especially SMEs, are still in the transitioning period of the GST regime. ‘The adoption of new accounting framework like MPERS is least on their mind now,’ he said.

Tan added that some SMEs do not have qualified teams to implement the new accounting framework and their reliance on auditors is still very high. ‘MPERS is an international standard for SMEs; it is not the same as PERS,’ he said. ‘There is a wrong perception that it’s just adding “M” to PERS’.

Mok said that the challenge is to get the message to the right decision-makers on what they need to do regarding MPERS or MFRS. ‘Currently, the finance people are aware of this. How much effort they want to put into it now depends on the budget, whether their bosses are convinced and willing to spend money on this.’

Yong believed that smaller companies are not too concerned about the new accounting framework. ‘Their preoccupation is to get their accounts out and that they don’t have to pay so much tax,’ she said.

Ng Choon Jin, a partner at SL Ng & Associates, agreed that many business owners were not too worried about this issue. ‘For them, that is the amount of fee they are going to pay, and whatever standard you want to use is up to you [the accountant],’ he said.

Penalty perception

On why many companies are more concerned by submissions for GST than dealing with MPERS, Ng said that there is a perception that ‘there are penalties  arising from non-compliance with GST as opposed to non-compliance to accounting standards’.

However, Hoh said that there was a need to ‘refer them to the requirements of the Companies Act, which could result in possible jail terms for directors if they fail to prepare a set of accounts in accordance with the applicable approved accounting standards in Malaysia’. 

He added that companies need to realise that ‘the directors of the company are responsible for filing a set of accounts that is in compliance [with the applicable approved accounting standards].’ He said that it would be a serious matter if the auditor issues a qualified opinion on the basis that the company did not prepare their financial statements in accordance with the applicable approved accounting standards in Malaysia.

On the lack of urgency among companies to transition to MPERS, Mok pointed out that many private entities do not consider 1 January 2016 as the implementation date. ‘They think they still have one more year before they need to close their accounts, so why worry? That’s the mentality,’ he said.   

With MPERS, while the rule requires private entities to comply from 1 January 2016, the new framework requires companies to have retrospective prior-year figures for comparison. ‘The implication here is that they will need to convert current-year figures in accordance with MPERS to enable this comparison for next year’s financial statement,’ Mok said. ‘Hence, the urgency for private  entities to prepare for MPERS early. To start now would in fact be a little delayed, but they must begin the transition now.’ 

Understand the gaps

The PPC members also discussed the measures that companies need to take to prepare for the transition from PERS to MPERS or MFRS. One of the first steps is to do a gap analysis, Mok noted.

‘They have to understand what are the gaps between PERS and MPERS and also MFRS so that they can evaluate which framework best suits them,’ he said.

The gap analysis, Mok said, can be conducted by the companies themselves or their auditors. ‘The analysis will tell you the gaps between the current accounting policies and new accounting policy, the areas that are different,’ he said.

Mok pointed out that companies need to continuously monitor changes to the accounting standards. ‘This is not a one-off. Standards evolve. When you move to MPERS or MFRS, it is a live standard,’ he said.

From the perspective of the practitioners, the transition to MPERS or MFRS presents another set of problems for them and their staff. ‘Our staff will now have to face the challenge of having to familiarise themselves with two accounting frameworks going forward,’ Mok added.

Ng suggested that accountancy firms may need to consider having two separate groups of staff to handle MFRS and MPERS clients to avoid confusion. He added that staff also need to be provided with ample training on the standards.

As with the introduction of new accounting standards, Mok anticipated some teething problems for private entities. ‘It will help if they have qualified accountants to ease the transition, whether internally or engaged as consultants,’ he said. 

MK Lee, journalist